UTILI- LOW Static Efficiency Intensive Efficiency SATION OF
LABOUR
CAPACITIES HIGH Extensive Efficiency Dynamic Efficiency
3.2 Contingencies of Equality and Efficiency
Why should (relative) economic equality, ie small disparities in families' disposable income affect economic efficiency? The underlying assumption in standard neoclassical economics is simply that markets generate differential income according to differential inputs by individuals and to the valuation of the output by the market. Differential inputs depend on acquired assets, natural abilities, and efforts that determine together the individual's level of productivity; the valuation of the output reflects the tastes of the consumers as well as the production decisions of others (law of supply and demand). Because the rules of the game are the same for all, the differences in outcome are viewed as fair as long as every loser has the chance to change his or her decisions according to the market signals so as to be a winner in the following rounds. On these assumptions, any intervention to redistribute market income must lead to a reduction of efficiency almost by definition. Efficiency losses arise mainly through reduced work efforts, disincentives to private saving and administrative costs of redistribution or - in other words - through the famous "leaky bucket" (Okun 1975:91ff).7
For a systematic evaluation of efficiency losses and efficiency gains through redistributive measures see Haveman 1988:46-49).
Okun, however, was well aware of the difference between economic equality and equality of opportunity. In fact, he devoted a whole chapter (out of four) to the ways in which civilized societies promote equality (and pay some costs in terms of efficiency) by establishing social and political rights that are distributed equally and universally and that are intended to be kept out of the market place. Contrary to extreme libertarian views, he recommended restricting the market clearly to its proper range of economic issues: "The imperialism of the market's valuation accounts for its contribution, and for its threat to other institutions. It can destroy every other value in sight. If votes were traded at the same price as toasters, they would be worth no more than toasters and would lose their social significance." (Okun 1975:13) We will have to come back to this conclusion because people value jobs not only in economic terms (ie, market income) but also in social terms (ie, psychic income).
Okun was also conscious of complementary relationships between equality and efficiency and did not assume - as many mainstream economists persists in doing - the universal applicability of the trade-off:
"Measures that might soak the rich so much as to destroy investment and hence impair the quality and quantity of jobs for the poor could worsen both efficiency and equality. On the other hand, techniques that improve the productivity and earnings potential of unskilled workers might benefit society with greater efficiency and greater equality."(Okun 1975:4)
The latter possibility has been poignantly reformulated and extended in a more recent work as the "opportunity based vision of a handup and not a handout" (Haveman 1988). In his informative and stimulating book
"Starting Even", Haveman criticises the old-style welfare state that attempted to offset competitive handicaps primarily by redistributing mar-ket outcomes. The United States was particularly consistent in pursuing this maxim. Looking back on the last forty years, however, Haveman finds out disappointingly that progressive tax rates and, in particular, increasing transfer payments were only ever able to neutralize the growing economic disparity before taxation and transfer payments. He claims that nothing has changed with regard to the unequal distribution of disposable income.
It has also been shown theoretically that increasing redistribution of disposable income does lead to more equality but at a lower average
standard of living (Baumol 1986). Haveman shows that "equality cum efficiency" measures are possible, especially if the equalizing policy is focused on opportunities instead of on outcomes, eg, by the improvement of technical and social skills of the working poor.8
Okun also stressed the potential economic value of equality of opportunity: "Whenever trading decisions in the marketplace are influenced by the personal characteristics of buyers and sellers as distinct from the quality and characteristics of the products they wish to deal in, that market generates an inequality of opportunity as well as an economic imperfection. Consider, for example, cases where job opportunities are influenced by race and sex. These may involve poorer pay for a given job -exploitation - or exclusion from the good jobs. When a women gets as good a job as a man with equal skills would obtain but is paid less, the exploitation creates unjustified inequalities; but it may not have much effect on efficiency, at least in the short run. On the other hand, if women are excluded from responsible jobs, they are prevented from using their skills to the fullest extent; that is inefficiency - in effect, the worker's hand is tied behind her back. The empirical evidence identifies exclusion as the main form of discrimination in labour markets. It produces a triplet of evils: unequal opportunity, unequal income, and inefficiency. Moreover, unequal opportunity at one point in time generates unequal opportunity over time. Once people are excluded from good jobs, they are deprived of the incentives and opportunities to develop the skills that would otherwise qualify them for good jobs."(Okun 1975:77) Another evident source of economic inefficiency is the unequal access to, in particular, the higher education system (Okun 1975:81).
Unequal treatment may also result in an inefficient allocation of resources. Where, for instance, equally productive men and women are hired for different jobs and women's jobs are lower paid due to occupational segregation, prices do not serve as accurate indicators of
Haveman, writing in the U.S. context, suggests five major provisions for an equality cum efficiency strategy: an income safety net, a minimum income in retirement, a national child-support program, an employment subsidy to increase jobs for low-skill workers, and a capital account for youth to equalize start-up opportunities (Haveman 1988:24, 149-177).
social costs. In comparison to the non-discriminatory situation, society produces "too little" of the outputs that use "overpriced" male labour, given that equally productive female labour is available at a lower price to expand production. Society produces "too much" of the outputs that use
"underpriced" female labour, given that the contribution of equally productive labour is valued more highly in the male sector. The public sector may be a candidate. Inefficiency caused by discrimination is even greater when taking into account feedback effects. If women are deterred from investing in their human capital because of discrimination, society loses a valuable resource. Thus, opening doors to women that were previously closed (or only slightly ajar) benefits society as well as individual women by bringing their talents and abilities to bear in new areas (Blau/Ferber 1986:262-3).9
From a game theoretical point of view, Schotter adds a further argument against wide differentials of rewards: Excessive differentials between market outcomes may be considered as unfair affecting work incentives. "An 'efficiently organized' economy may define outcomes that a substantial portion of the population may consider unfair. Those people that do relatively well under the existing set of institutions may have an incentive to work hard, but those who do poorly may become discouraged and stop trying. Now, contrast this situation with an 'inefficiently organized' economy that the overwhelming majority consider to be fair. If this sense of fairness increases the effort of the previously discouraged population to a point where the average effort of workers in the economy is increased, then this 'inefficient' but equitable set of institutions may produce a greater output than the 'efficient' economy. Hence, if people think they are playing a fair economic game and this belief causes them, on average, to try harder, equitable economic institutions may turn out to be efficient as well."(Schotter 1985:30-1)
These costs may be significant as, eg, the Canadian Task Force reports: By increasing participation and eliminating misallocation of women's labour force, gross domestic product per person in Canada would be 20% higher by 2006 than it would be if present trends continue. Removing discrimination alone (without accelerating participation) would increase output by 10% (Beneath the Veneer 1990, Vol. 1:116).
Finally, a remark on the analogy of games theory: a labour-market game differs from sporting games in one essential element at least: most players on the labour market have to play, whereas sportsmen and women can choose the game with rules that best suit their talents. Thus, on the labour market the rules of the game have to be adjusted to (many) players, whereas in sport it is the players who have to adjust to the rules.
As the above considerations show: there is no necessary trade-off between equality and efficiency; the relationship is contingent, as shown in figure 5. It depends on the problem and on the efficacy of coordinating institutions whether the "marriage" of equality with efficiency develops into a harmonious and mutually productive liaison or into a vicious circle that may end in disaster in a process reminiscent of marriage scenes by Virginia Woolf. The most promising candidates for a "virtuous"
relationship seem to be measures enhancing earnings capacities, providing equality of employment opportunity, supporting a wage structure considered as fair, and providing income security to cover risks or uncertainties.
Two questions, however, remain to be answered: Which institutions and which institutional mixtures promise to support such a "virtuous marriage"? How far shall we go with (which) equality-promoting measures at the cost of (which) efficiency? An extended transaction cost perspective will be used to illuminate the first question, while the second question will
be discussed using theories of justice or injustice.
3.3 Institutions in an Extended Transaction Cost Perspective
An excellent clarification of the comparative efficiency of institutions has been provided by William G. Ouchi. His article "Markets, Bureaucracies, and Clans" (Ouchi 1980) is especially helpful due to links it establishes between transaction costs and equity issues in the employment relationship. It takes explicit account of the fact that the exchange of labour against wages is often different from the exchange of marketable goods and services or capital.